Psychology of Money by Morgan Housel is one of the more popular and useful books written about finance in the last few decades. It's a discussion about finance that doesn't typically take place. The more prevalent books written in this space usually focus on numbers, investments, and strategy. Talking about the psychology of money is such a big part of it because everyone has their own experiences, philosophies, and preferences. It matters. That being said, let's dive into this summary starting with the first point.
Everyone is different
The book talks about how two extremes could be perceived in a different light. One person invests in NFTs and another person puts their money under their mattress. The reason why they are doing that is shaped by their personality, preferences, and life experiences. We may view those moves as strange or counter to what we would do, but it doesn't matter because it makes sense to them.
Comparison is the thief of joy
Comparing yourself to other people is hurtful to you in several different ways. Comparing yourself to others that appear to be worse off than you can make you prideful and inflate your ego, which isn't good. Comparing yourself to others that appear to be doing better than you could leave you wanting more. Morgan says that you shouldn't sacrifice what you have to attain what you don't need. Learn to be grateful for the life you're living. Instead of inflating your lifestyle every time you get a raise or a bonus, put that extra money into your retirement/investment account. The world is filled with wealthy people that look poor (stealth wealth) and poor people that look wealthy and that are living off of credit.
You don't have to hit it out of the park every time you make an investment decision, you just have to make more good decisions than bad ones. Doing your homework, creating an investment plan/strategy, and putting your money to work is the first step. The next step is sticking to your convictions when the market pulls back or when the economy starts to underperform. If you're confident in how you invested your money, then don't panic. In investing, cooler heads prevail. Unless extraneous circumstances present themselves, don't deviate from your strategy and let compounding do its thing. Albert Einstein says, "It's the most power force in the universe."
Staying the course
I wanted to touch on this point again because it is so important. Morgan says to "be reasonable, not rational." Rational means emotionless and calculated. A rational person would likely sell their investment when they start going down. A reasonable person would evaluate the situation and then, likely, stick to the plan they began with. A reasonable person takes into account dips in the market or black swan events they can't foresee.
Pessimism sells. The economists and market analysts that get the most TV time are the ones that fear mongers and spout doom and gloom for the economy. We magnify the negative. It's how we survived when we roamed the earth with sabertooth tigers and didn't have a reliable food source.
Spending your money
Morgan makes two main points on spending your money. The first one is not to delay until you're retired to spend what you've saved. Within reason, you have to be able to enjoy what you've worked for. The second point is to buy your time back. You can always make more money, you don't get to make more time. Spending your money on things that free up your time is worth every penny. Having someone cut your grass instead of spending an hour or more each week doing it yourself, for example.
If I could summarize the book in one sentence it would be to not compare yourself to others, stick to your convictions, and enjoy what you've earned within reason.
If you would like to read this book for yourself, this link will take you to Amazon! And if you'd like to talk about the book, please don't hesitate to reach out!